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Insurance Law
Villanova University School of Law
French, Christopher C.

Insurance Law – Fall 2012 – Professor French
 
 
1.     Warranties and Representations
a.      Breach of Warranty (p.8-15)
                                                              i.      Warranty: a condition or contingency in a policy required for formation of valid K.
1.      Standard:  Breach of warranty or representation must be shown to be material to show breach of K
2.      Breach:  Breach of warranty voids the policy even if that breach did not contribute to loss in question or increase risk that a loss would occur.
3.      Generally applies to potential causes of loss.
                                                            ii.      Cases:
1.      Vlastos v. Sumitomo (3rd Cir. 1983) (p.8-13):  Old Law  Fire to building in which janitor was living on part of the 3rd floor vs. massage parlor
a.       Representation:  not part of the insurance contract; collateral to it
                                                                                                                                      i.      Breach Standard: insurers must show that the provision was material to the risk insured against in order to avoid paying under policy.
b.      Warranty: guarantee – presumed to be material to the contract (no longer the law)
c.       Material Risk:  if the underwriter had known this fact, would they have written the policy or charged a higher premium?
 
b.      Misrepresentation (p.15-19)
                                                              i.      Misrepresentation Law: 
1.      Standard:  insurer must show that representation was
a.       False – substantially true is enough for insured
b.      Material; and
c.       Induced justifiable reliance
2.      Concern:  addresses adverse selection
3.      Concealment:  insurer must prove a failure to disclose a fact that the applicant knows is material in order to void the policy.
a.       Innocent failure to disclose does not make the policy voidable.
4.      Inquiry Notice Rule:  If insured furnishes reasonable complete answers that could lead an insurer to the info it seeks through diligent follow-up search, there has been no misrep or concealment. (Neill)
5.      Duty of Insured:
a.       Read things before you sign them.
b.      If there is a change to any material representations or warrants you must disclose it prior to the  policy going into effect.
c.       Do not need to disclose a change or during the claims process.
                                                            ii.      Neill v. Nationwide (p.20-26) Agents  home damaged in fire; insurer denied claim because insured had prior fire losses that were not disclosed; court finds no misrepresentation
1.      Agents Rule:  Where the facts have been truthfully stated by an insured to the soliciting agent, but by fraud negligence, or mistake, the facts are misstated in the application to the insurer, the insurer cannot rely on the misstatements in avoidance of liability, if the agent was acting within his real or apparent authority and there is no fraud or collusion on the part of the insured. (Neill)
2.      Inquiry Notice Rule(above)
                                                          iii.      Mackenzie v. Prudential (p.26-30) Timing/Changed Info insured said no cardiovascular issues but then developed one before policy went into effect.
1.      Duty:  disclose changed that are material during process of application up until you get the policy.  Answers are deemed to be continuous obligation until policy is delivered. (Mackenzie)
                                                          iv.      PA Rule:  Burden on insurer to prove misrepresentation by clear and convincing evidence that policyholder:
1.      Failed to disclose or provided inaccurate information.
2.      Intent to deceive
3.      Material to risk being insured.
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Incentives for Insurer to get it right:  (1) Duty to defend; (2) Duty to Settle; (3) Bad Faith
a.      Insurer Bad Faith (Assignment 21 and 22) – (pp. 442-462)
 
                                                            v.      Rules:
1.      Implied covenant of good faith and fair dealing in forming insurance contract
2.      Carrier must give equal consideration to policyholder’s interests as though equal to carrier
3.      Standard:  Whether the insurer knew or should have known that it did not have a reasonable basis to deny the claim
a.       If coverage for claim is fairly debatable then there is no bad faith
b.      Mere negligence is not enough
4.      Must have coverage to have bad faith
a.      Some courts are expanding – can now get for bad treatment, shotty investigation, but hard to show damages
5.      Damages: 
a.      Tort damages à additional compensatory damages (mental anguish etc.)
                                                                                                                                      i.      Generally hard to show beyond injury and legal fees, (in Silberg – business failing)
b.      Punitive Damages:  Need to show intent;
6.      Group Claims:  bad faith claims are pre-empted by ERISA for group claims
7.      Sword and Shield Doctrine:  Allege bad faith for denial but can’t get evidence because of privilege – then claims handler testifies why they didn’t give you claim
a.      Method:  motion to compel – produce a witness and documents or you can’t use it during trial – force insurer to be asserting the privilege
b.      Can’t selectdively disclose stuff at trial by hiding behind privilege now; either produce or stuck w/ no evidence at trial
                                                          vi.      Silberg v. California Life, (p.442-451)  see notes
                                                        vii.      Pilot Life v. Dedaux, (p.454-461) bad faith w/ group policies
 
 
2.     Insurance Contract Formation and Interpretation (assignment 3)
a.      Rules & Policy:
                                                              i.      Purpose:  The purpose of interpretation is to determine the intent of the parties.
                                                            ii.      Interpretation
1.      Extrinsic Evidence: 
a.      Unambiguous Provisions:  not admissible to prove the meaning of an unambiguous contract provision.
b.      Ambiguous Provisions: 
                                                                                                                                      i.      Majority Rule – no extrinsic evidence.
                                                                                                                                    ii.      NY – does allow extrinsic evidence.
2.      Read as a whole, consistently for all provisions
3.      Give effect to all of the provisions.
4.      For language to be unambiguous, insurer’s interpretation must be the only reasonable interpretation.
a.       Defining undefined policy language:
                                                                                                                                      i.      Court here goes with custom usage in particular business (not majority rule) (WTC Properties)
                                                                                                                                    ii.      Majority Rule:  Ordinary, plain meaning as understood by a laymen
1.      Look at dictionary
2.      Policyholder is not an expert.
                                                          iii.      Principles: 
1.      Insuring agreement/coverage is broadly construed (in favor of policyholder)
2.      Exclusions/limitations in coverage narrowly construed (against insurer)
3.      Policy provisions interpreted as they would be understood by the typical policyholder of the kind of policy.
4.      Contra Proferentem:  “against the drafter” ambiguous provision (one subject to 2 reasonable interpretations) interpreted against drafter/insurer.
 
b.      Construing Ambiguities Against the Insured (p.37-42)
                                                              i.      Vargas v. Insurace Co. of North America (p.38-42)  aviation insurance policy states it applies only to US, its territories or possession; Insurer says this means specific area; insured says this could cover area traveled in to get between 2 covered points.
1.      Carrier must show that their interpretation is the only reasonable interpretation.
2.      Insurer could have used clearer language.
 
                                                            ii.      WTC Properties v. Hartford Fire Insurance Co. (p.43-51) Interpreting Binders (issued before actual policy):  determining if the word “occurrence” is ambiguous (no definition in policy)
1.      Number of occurrences is a factual issue for jury
2.      Policy language is question of law
3.      Defining undefined policy language:
a.       Court here goes with custom usage in particular business (not majority rule) (WTC Properties)
b.      Majority Rule:  Ordinary, plain meaning as understood by a laymen
        

nt Agency v. Bailey Wood Products (p.66-69)  Authority of the Agent
a.      Insurer gave agency authority to bind it into insurance contracts; authority is limited by certain risks requiring insurer permission; Agent told insured they would be covered and prepared a binder; Agency did not seek prior approval from insurer despite risk of saw mill.
 
                                                            ii.      Waiver and Estoppel (p.70-75)
1.      Waiver (question of fact):  voluntary relinquishment of a known right.
2.      Estoppel:  results from a change of position by the insured as a consequence of some representation or act by the insurer.
3.      Doctrine: 
a.       Majority:  if bad conduct/misrepresentation occurs after the facts, that will not change the terms of the policy.
                                                                                                                                      i.      Estoppel is not available to bring w/in coverage risks not covered by its terms or expressly excluded in policy.
b.      Minority:  claim if lie/misrep occurs before placement of policy was made and there was detrimental reliance.
                                                                                                                                      i.      When an insurer or its agent misrepresents the coverage of an insurance contract, or the exclusions therefrom, to an insured before or at the inception of the contract, and the insured reasonably relies thereupon to his ultimate detriment, the insurer is estopped to deny coverage after a loss on a risk from a peril actually not covered by the terms of the policy.
4.      Analyzing Before/After Requirement:
a.       At the time the policy was made, what was the agreement made for? What did the policyholder think he was getting?
b.      During the claims process, you already have policy in hand, so you could not have detrimentally relied on the misrepresentation
5.      Usually occurs when you are sued and carrier agrees to cover you, then finds out unfavorable facts and tries to pull out close to trial – courts will make them defend you fi it would prejudice you.
6.      Roseth v. St. Paul Property & Liability (p.71-73)  Livestock truck accident with policy that only provided for animals killed, not for the injured animals; Claims handler told him he had duty to minimize losses but did not tell him he had coverage
a.       Requirement for estopping conduct to occur before or at the inception of the policy. 
b.      Here – only indirectly perpetuated a misconception at best; estoppel not available under these facts.
 
                                                          iii.      Broker Liability [p.61-119 Supplement] 1.      Duty to Policyholder:  Exercise reasonable skill and knowledge of someone in the profession (essentially standard negligence).
2.      A Broker can be held liable for:
a.      Failing to procure coverage requested by insured
b.      Failing to procure appropriate coverage for insured even though insured does not review the policy to see what insurance was actually purchased
c.       A breach of fiduciary duty to the insured.
3.      A broker can avoid liability if:
a.      Policyholder didn’t follow Broker’s advice or
b.      Policyholder misrepresented a facts
4.      Aden v. Fortsh (sup. P. 105-119)
a.      Broker cannot assert comparative negligence saying insured made a mistake à Can’t be hired as a broker and then blame the policyholder for failing to catch your mistake.
b.      If the broker does not get the correct coverage, they are liable for not getting the coverage they were supposed to get.